An often asked question in the tax and
labor area is whether a worker should be considered an employee or an
independent contractor. The difference in characterization can have
serious implications for both the worker and the hiring party. If a
worker is considered an employee, there are significant tax
consequences. Employers are required to pay social security taxes
(FICA), unemployment taxes (FUTA), and are required to withhold social
security and income taxes (Federal, state and local) from employee
wages. By contrast, the hiring of an independent contractor does not
carry with it many of these tax and recordkeeping burdens.
Self-employed persons who work as independent contractors are required
to make their own estimated income tax payments and self-employment
social security tax contributions (SECA).

Whether a person is
characterized as an employee or as an independent contractor also has
non-tax consequences. Workers who might otherwise be required to be
included in employee benefit plans or group insurance programs often
can be excluded if they are truly independent contractors. In addition,
independent contractors usually are not subject to (and are not covered
by) an employer's worker's compensation policy.

Because of the significant economic consequences at stake, workers and
their potential employers often go out of their way in an attempt to
characterize the relationship as an independent contractor arrangement.
These efforts have not been lost on the Internal Revenue Service,
however, and the IRS has developed a comprehensive list of factors to
be considered in determining whether a person is an employee or an
independent contractor. Not surprisingly, most of these factors negate
a finding of independent contractor status.

Here is a list of some of the more important factors utilized by the IRS in making this determination:

Employees are controlled and directed by the employer as to how they work and as to the end result; independent contractors have freedom to determine the best means to achieve the hiring party's goals.

Employees must perform services personally and cannot delegate their duties; not so for many independent contractors.

The IRS has become relatively aggressive
in enforcing the distinction between employment status and independent
contractor status. As the foregoing list of factors indicates, it is
difficult to meet the independent contractor test. Because of the
consequences in mischaracterizing the relationship, prudence dictates a
careful review of these and other factors to insure that the work
relationship is properly structured and accounted for.